XII. Good Money is Always Scarce

XII. GOOD MONEY IS ALWAYS SCARCE Can free enterprise provide consumers with enough money to buy all the products of industry at profitable prices? Some people say that wage earners, under private enterprise, are not paid enough to buy the products of their own labor. This, they believe, leads to periods of overproduction, unemployment and depression. This "underconsumption theory" of depressions is a basic idea in Marxian communism and in most socialist thinking. Many of its adherents, however, sincerely believe themselves to be friends of enterprise and opponents of socialism. The underconsumption theory of depressions is used to support various measures supposedly designed to put more money in circulation and increase consumer buying power: a. increased public spending financed by inflationary methods; b. discriminatory taxation of the investing classes; c. monopolistic and restrictive policies by government, trade unions, farmer organizations, and business; d. increasing "social security" payments to nonproducers.

These policies are rapidly destroying private enterprise. Their results are socialistic whether those who advocate them consider themselves socialists or not. The fallacy of the underconsumption theory, therefore, must be exposed if we are to restore and preserve private enterprise. Otherwise, unsound monetary and financial policies will destroy it even while everyone professes to favor it.* Money Is Essential to Progress The economic progress of every tribe or nation has kept close pace with improvements in its monetary and financial policies. Economic progress depends on increasing production. Increasing production depends on increasing specialization among workers, as well as on increased use of tools and machinery. *Stuart Chase is an outstanding exponent of the doctrine that we must accept socialistmonetary and financial theories and adopt socialistic tax and spending programs in orderto "save" private enterprise. See, for example, his Where's the Money Coming From?published by Twentieth Century Fund, N.Y., 1943.

GOOD MONEY IS ALWAYS SCARCE 113 Increasing specialization by workers depends on development of trade. Development of trade depends on progress in use of money. Monetary and financial progress has been closely related to the development of constitutional government. The currency has had to be protected against counterfeiting by private citizens and against debasement by government. A sound banking system can exist only where the citizens' savings are secure against arbitrary seizure by government, as well as against theft by bandits. Moral progress, in the form of increased honesty and mutual confidence, also has been an essential factor in monetary and financial progress. Both in private finance and public finance, improvements made during the 250 years before 1914 compare favorably with the progress in natural science and industrial techniques. How Banking Began In making these monetary and financial improvements, private enterprise in banking played a major role.

Modern banking in England began with the goldsmiths who accepted deposits of gold and other valuables for safekeeping. As their deposit receipts began to change hands in place of the gold which those receipts represented, these goldsmith-bankers helped to reduce costs of handling money and to speed up the rate of circulation. They were also thereby providing a more convenient medium of exchange than gold. At the same time their accounts were important in helping to preserve records of business transactions. Gradually these goldsmiths took to lending part of the funds left with them, sharing profits with the depositors. As time went on bankers found themselves dealing more and more in claims on wealth other than gold. These claims consisted of property deeds, mortgages, bonds, promissory notes and the like. They accepted these property rights in repayment of loans. They also made loans on the basis of such property instruments.

That is, they "accepted," or honored bills drawn against them by borrowers who pledged with them their rights to real estate or other sources of income.

114 DO WE WANT FREE ENTERPRISE? This last mentioned development of banking, in the view of some observers, gives banks power to manufacture credit and money (deposit currency). Through centralized control of this power financial reformers seek to stabilize business. By raising the price of bank credit or by restricting the supply of it in boom times they hope to prevent inflation. By reducing the price of bank credit and increasing its supply when business begins to decline they hope to restore prosperity. Values Create Credit Under private enterprise, however, the power of the banker to manufacture credit and currency is essentially the same as that of every producer—no greater and no less. This is the power that arises out of owning valuable goods or being able to render valuable services. A shoe manufacturer who owns a stock of shoes can sell these goods on credit to a merchant. The merchant may give the manufacturer his promissory note. This note is a new credit instrument which the manufacturer may use in trade.

The merchant, in return, gets this credit from, or "has credit" with, the manufacturer because he is able to perform valuable services in marketing the shoes. If the merchant and manufacturer were sufficiently well known, their promissory notes could circulate like bank checks or paper currency. They could use such "due bills" to pay their workers and meet other expenses of doing business. Those who received these bills could use them to buy the finished goods. Suppose, for example, that there were 1000 pairs of shoes which the manufacturer "sold" to the merchant on credit for $5000. Suppose, further, that the merchant gave the manufacturer 5000 promissory notes for $1.00 each, which the manufacturer could endorse and pass on to wage earners and suppliers of materials, so that he could meet his expenses in manufacturing new shoes to replace those he had just sold. Then suppose that the merchant met all of his other expenses of doing business (rent, interest, wages and so on) with similar small-denomination promissory notes to a total of $4900, and that he then issued $100 worth of such notes to himself for his own salary and profit.

GOOD MONEY IS ALWAYS SCARCE 115 The merchant has then issued $10,000 worth of notes. He has put into circulation $10,000 worth of credit instruments which are essentially similar to bank checks. If, meanwhile, he has priced and sold his stock of shoes for $10,000, he can meet and retire all of his promissory notes, including those which he issued to himself as profit and to his creditors as interest. Thus producers could create the circulating medium necessary to take their goods off the market. There would never be too much or too little credit, or currency, outstanding as long as the total prices of goods offered for sale equalled the total value of currency issued and spent. In fact, the coins and notes issued by well-known merchants have circulated like money at various times in history. During the depression of 1930-1939, for example, the due bills of businessmen had considerable local circulation in New York City.

Under private enterprise, therefore, credit may arise with the production of valuable commodities, properties and services, as producers learn to know and trust one another and as they develop knowledge of values and markets. The volume of this credit depends on estimates of the value of goods and service^ offered for sale or as pledges for loans. This is essentially the way in which private credit is created and circulated. The role of the banks is not to manufacture credit but to investigate it and endorse it. Bankers Speed Circulation of Credit Bankers specialize in circulating credit. In the above example the banker may accept the shoe merchant's note as security for a "line of credit," or a checking account, to be used by the merchant in marketing the goods. Or he may accept the shoe manufacturer's note, possibly with the merchant's note! as additional security, for a line of credit to be used by the manufacturer in continuing production.

In either case the banker is not "manufacturing" credit any more than the merchant or manufacturer does when the merchant gets the credit directly from the manufacturer. The banker is merely substituting, on the credit instrument used for general circulation, his own better known name for that of the manufacturer or merchant. He is permitting the merchant or manufacturer to use checks, or orders to pay, drawn on a bank instead of the promissory notes of some less well-known producer.

116 DO WE WANT FREE ENTERPRISE? This makes credit instruments circulate more easily. In other words, it gives "currency" to credit. Farmers, merchants and manufacturers help create credit by producing valuable goods and services. The banker for the most part merely endorses the credit thus created by producers. Under private enterprise, he adds to the total volume of credit only as he helps producers increase output of goods by specializing more effectively in their own lines. When government enters the banking field, however, it may give bankers power to manufacture credit by enabling them to convert into legal tender credit instruments not backed by other values. This has been a chief cause of inflation, deflation and economic instability in modern times. "To Him that Hath Shall Be Given" Credit is self-renewing when it is used to produce goods whose value in the market-place is equal to the costs of production.

Loans used in this way can always be repaid out of the proceeds of the enterprise. They perpetuate the loan fund, or total volume of credit. When credit is used unproductively one of two things may happen: a. The loan may not be repaid. In that case the lender's future power to advance credit is reduced. b. The loan may be repaid by the borrower's drawing funds from other uses, perhaps selling property which he had intended to keep. In that case the borrower's future credit will be reduced. In either case unproductive use of credit eventually reduces the total amount of it available to the economy as a whole. For a time any individual, group or nation can look prosperous on borrowed money. But if the funds are used waste fully, the final result is greater poverty than before. Since the loss falls first on the borrowers and lenders most nearly responsible for unproductive investments, credit tends to gravitate to more efficient producers.

Those who use it more productively are better able to repay their borrowings and to accumulate property-rights. Thus credit grows with their productive ability and the value of their properties.

GOOD MONEY IS ALWAYS SCARCE 117 With this growth in credit goes increased opportunity to expand operations and to direct or control production. Conversely, under free enterprise, inefficient producers sooner or later experience decreasing credit and lose power to direct or control production. This does not mean that free enterprise increases the concentration of wealth and economic power. On the contrary, free enterprise opens opportunities in proportion to each producer's ability to make use of them. Every producer's abilities are limited. As he attempts to expand his control beyond his abilities he makes more mistakes and thus reaches the limit of his power to use credit effectively. This leaves open opportunities for competitors. Furthermore, efficient use of credit by one producer expands opportunity for producers in non-competing lines by increasing their incomes. These increased incomes provide increased opportunity to save and invest.

The more complex the economy the greater is the amount of intelligence required to direct it and the greater is the number of individuals required to share financial responsibility. (See above, p. 10.) In a free economy every producer shares the responsibility for planning. At least he is responsible for choosing his occupation, seeking a job, budgeting his income and spending for his own needs. As he increases his earning power he correspondingly increases his opportunity to buy or to lend. Increased buying or lending means increased economic influence and responsibility, because through buying and lending we induce others to do our bidding. Mob Psychology in Use of Credit Wide diffusion of responsibility under free enterprise is necessary to get the advantages of mass enterprise and mass initiative. But this wide diffusion of freedom and responsibility makes a free economy subject to the risks of mob psychology.

To some extent the errors of individuals may compensate for one another. The unforeseen losses from unsuccessful investments, for example, are offset by the unexpected gains from unusually successful ventures. At times, however, large numbers of producers may make the same type of error. Then there is first a boom while they hope118 DO WE WANT FREE ENTERPRISE? fully make their investments, followed by a depression when the returns prove insufficient to pay the costs or to meet the obligations incurred. Booms result when borrowers and lenders become overoptimistic concerning the amounts which can be produced and the prices at which goods can be sold. The face value of the credit instruments in circulation then expands faster than production of goods. This causes rising prices and rising incomes in terms of money. Some lines become over-expanded in the sense that consumers will buy the output only at prices which are too low to cover all the costs of production. Rising prices in domestic trade may also cause an adverse balance of payments in foreign trade.

This adverse balance of payments causes loss of gold and securities and necessitates a contraction of credit. These conditions cause losses to investors and creditors and necessitate deflation of prices and credit. If these losses are quickly absorbed and widely shared, no serious decline in employment need occur. Depressions result from widespread pessimism concerning prospects for production and prices. Credit then contracts faster than production. This causes falling prices and declining money incomes. If all prices and incomes fall together, no harm need result. But some producers who are favored by long term contracts or who are better organized, for a time may be able to maintain their prices and incomes. This concentrates the losses on other producers, some of whom are forced to close down entirely because their prime costs (i.e., costs other than "overhead" costs) exceed selling prices. Thus the losses spread.

"Agree With Thine Adversary Quickly" A nation may increase unemployment: a. by restricting the freedom of producers to accept terms offered for their services; b. by creating discontent among producers with the terms being offered for their services; or c. by permitting or encouraging producers to insist on being paid more than their services are worth to others. Money may be plentiful and prices high. Yet large-scale unemployment may persist because wage earners are asking for more GOOD MONEY IS ALWAYS SCARCE 119 than the value of their services in production, or because government or trade unions forbid them to accept what employers can afford to pay. When all members of an enterprise are on a percentage basis, no one need lose his job merely because the total income of the firm declines. Each member gets less but each still gets something as long as any business remains. Whaling expeditions used to operate in this way.

However, when most of the workers and investors in an enterprise insist on rates of pay determined before the returns are in, the whole burden of declining business falls on a few. These specialists in risk-taking make more in good times by this arrangement, but they often find themselves getting less than nothing when business falls off. Then they shut down operations and everybody loses. f£ven in good times the average profit margin is comparatively narrow. In 19281929 the average net income after taxes of all United States corporations was 5 per cent of gross receipts. In 19411943 it was 3.56 per cent. From 1919 to 1935 total corporation profits were 2.17 per cent of gross receipts. Only a slight rise in costs, therefore, or a comparatively small decline in prices and sales volume suffices to turn profit margins intc losses for great numbers of business concerns. To stabilize employment, production and real purchasing power, therefore, one of three things is necessary: a. greater flexibility in wage rates, rents and interest charges; or b. wider profit margins for risk takers; or c. increased supplies of equity, or venture, capital.

The more easily the enterpriser can adjust wages, rents and interest charges in times of declining business, the narrower can be his margin of profits in good times as well as bad, and the more stable will be employment and production. Flexibility of wage rates is especially important because wages make up roughly 70 per cent of the total cost of production. In 1940 employee compensation amounted to 70.4 per cent of the total realized income of the United States. Interest, rents and royalties together made up about 10 per cent. Net profits of incorporated business were about 7 per cent of the total national income. Incomes of farmers and unincorporated enterprises accounted for the remaining 12 to 13 per cent.

120 DO WE WANT FREE ENTERPRISE? In recent decades wage rates have become more and more inflexible in times of depression. This, not the supposed disappearance of our frontiers, is the reason for the growing problem of unemployment. Unless wage earners will readily agree to accept reductions of wage rates when business is declining, we must expect periods of mass unemployment, with consequent intensification of business depressions. Why Depressions? Some critics ask, however, "Why should business ever fall off? Why should it not continue to grow as long as people want goods? All that is needed is to put enough money into their hands and we shall create a perpetual boom for every business." The answer lies in the limitations of human intelligence and the instability of life, especially progressive life. Man rules the animal kingdom because he preferred progress to stability. Creatures like snails and turtles, who put security before progress, were long ago left behind in the struggle for domination.

But progress requires experimentation, trial and error. It means suffering losses from mistakes as well as enjoying the gains from successes. It requires elimination of the wrong as well as survival of the right. Probably most new ideas are wrong. At least many of them are. But men often must spend their own time and resources, as well as those of other people, in trying out a bad idea before they discover what is wrong with it. Such mistaken expenditures of time and resources are bad investments. Yet they are an unavoidable price of progress. Governments often have tried to make business booms perpetual. These attempts always have failed because they meant perpetuating mistaken investments as well as wise investments. Bad investments cannot be liquidated without losses to the investors and to others depending on them. And when these investments have been financed by borrowed funds, or loan capital, the results are especially disastrous.

Some of these bad investments are on a small scale and are offset by effects of good investments by other people. Average wages, for example, advanced on the average about 3 per cent per annum in the United States from 1922 to 1929, not because the average wage earner was working harder, but because he was sharing in the gains from increasing use of machinery and labor-saving methods.

GOOD MONEY IS ALWAYS SCARCE 121 Every now and then, however, great numbers of people are carried away together on a wave of enthusiasm for some form of investment. Then excesses result even though there was a sound basis for some expansion. Booms and depressions, therefore, are inherent in all progressive societies, and attempts to prevent them have often made them worse. This is not to imply that nothing can be done or has been done to guard against business depressions and reduce the wastes resulting from them. Those who say that our financial institutions have failed to keep pace with the progress of industrial methods forget that our industrial progress would have been impossible without the development of modern financial methods. Unwise interference with these financial techniques is now threatening to destroy or hamstring the industrial efficiency which some people mistakenly believe has "solved the problem of production."

Especially dangerous is the interference which transfers banking functions from the hands of competing enterprisers to centralized, bureaucratic agencies. Such restriction of enterprise and centralization of control does not simplify the task of financial management. Neither does it increase the amount of intelligence brought to bear on it. Instead, it puts all of the community's financial eggs in one basket. And this basket is too large for any small group of individuals to carry. In a press statement, March 13, 1939, the Board of Governors of the Federal Reserve System said: "Experience has shown, however, that (1) prices cannot be controlled by changes in the amount and cost of money; (2) the Board's control of the amount of money is not complete and cannot be made complete; (3) a steady average of prices does not necessarily result in lasting prosperity; and (4) a steady level of average prices is not nearly as important to the people as a fair relationship between the prices of the commodities which they produce and those which they must buy.

"Steady prices and lasting prosperity cannot be brought about by action of the Federal Reserve System alone, because they are affected by many factors beyond the control of the Federal Reserve System."

122 DO WE WANT FREE ENTERPRISE? Non-banking Sources of Credit The truth is that even the banks, with the help of all the other specialized financial agencies—investment houses, insurance companies, security market operators and the like—cannot discharge all of the financial responsibilities of our economy without help. These responsibilities are shared by all investors, lenders, merchants, and other producers who act as creditors and enterprisers. Most of those who borrow for productive purposes also have some capital of their own invested. This capital which producers own is their "equity." It is used as security for borrowings. It is also used to extend credit to others. It is the seed-corn of credit. Non-banking credit is one of the most important sources of buying power. Loans between individuals, charge accounts, open book accounts, and due bills are illustrations of this non-banking credit.

It helps determine the volume and direction of buying and production. Since it can increase or decrease independently of bank credit it acts in some degree as a counterweight to bank credit. It is used to finance numerous, small, individual enterprises which the professional financier will not, or cannot, handle. Often these small beginnings become large undertakings. For example, non-banking sources supplied the capital for the beginnings of the Bell Telephone Company and the Ford Motor Company. Purchasing Power Is Produced The problem of maintaining purchasing power is essentially a problem of organizing and directing production in all of its aspects, including marketing. Purchasers can buy only what has been produced. Credit depends on possession of valuable goods or ability to produce them. The role of government in maintaining the purchasing power ot its people should be considered in relation to its ability to encourage production.

The following principles, therefore, should determine monetary policy: GOOD MONEY IS ALWAYS SCARCE 123 1. Money is useful only when it is scarce. Food and clothing would still be useful even if they were produced in such abundance that everyone could get all he wanted without paying for them. But money is useful only when people don't have enough of it. Then they will work to get it. In working for it they produce food, clothing, entertainment and other things needed for national prosperity and strength. 2. Money does its work by going from one person to another, that is, by circulating. In this also it differs from other useful things, like bread or shoes, which finally stay with someone who uses, or "consumes," them. 3. The, amount of buying and spending depends on the velocity of circulation as well as on the total amount of outstanding money and credit. The amount of money and bank credit in the United States was about 30 per cent greater in 1939 than in 1929, but prices and the volume of business were considerably below 1929 levels because of a lower velocity of circulation.

4. Circulation of money creates purchasing power and prosperity only when it gets useful things produced and moving into the hands of consumers. Policies which restrict production and trade hold back buying power no matter how much money is put into circulation. 5. Most of the nation's spending is done by producers in the process of production, not by the final consumers. Farmers buy land, machinery, seed and labor to raise crops. Processors erect buildings, buy machinery and materials and hire labor to make the finished goods. Distributors spend money in transporting and marketing them. In this buying and selling for production and trade, credit is generated and money is circulated. Whatever slows down these processes slows down the creation of both credit and values. Whatever speeds it up increases the rate and amount of spending. 6. Producers will continue their spending and circulation of money only as long as profit margins promise to be sufficient to cover the risks and responsibilities involved.

7. Unproductive use of credit ultimately reduces the community's purchasing power in two ways: 124 DO WE WANT FREE ENTERPRISE? a. Such use of credit wastes productive resources and reduces the supply of goods offered for sale. This reduces the purchasing power of money. b. It ultimately leads to a contraction in the total volume of credit or in the velocity of its circulation, or both. Loans that are repaid out of the sale of goods remain available for further use. Such funds can be reloaned again and again. But loans used to finance waste or idleness must be repaid, if at all, out of money drawn from other uses. If not repaid, the lender's future power to lend and the borrower's future power to borrow are so much reduced. 8. Periods of deflation, following unproductive uses of credit, are often aggravated by disputes over how the losses should be distributed. Recovery is often delayed by excessive costs and redtape involved in making necessary adjustments of capital structures, prices, wage rates and methods of production.

9. All classes should be encouraged to build reserves of credit to aid in reconstruction and recovery from periods of deflation. For business concerns this calls for creation of "equity capital." This equity capital, built in large part out of reinvested profits, provides the assets on which may be based needed credit expansion in times of emergency. The greater the volume of equity capital the greater is the power of business to obtain credit or to give credit. 10. Repeated experience has shown that free private enterprise can generate more than enough spending power to keep pace with the output of goods. In periods of deflation, such as that of 19301932, credit is contracting. The supply of it is insufficient to distribute (at the prices being asked for them) all of the goods and services offered for sale. But such shortages of credit result from previous misuse, or waste, of credit.

Continuous expansion of credit along with production is possible only as long as the credit is wisely used. That is, it must be used to produce goods in such proportions that buyers will take the entire output at prices covering costs of production. If the quality of credit is good, quantity will be adequate. 11. Repeated experience has shown that government is less economical and efficient in use of credit than is private enterprise. The greatest inflations have been carried out by governments, e.g., those of the United States during wartime, those of Germany, Russia and other European nations during and after GOOD MONEY IS ALWAYS SCARCE 125 World War I, and the inflation of the French Revolution. Government also played a leading role in the 1922-1929 inflation of private credit in the United States. (See above, pp. 39-40.) Government agencies are operated by human beings capable of mistakes like other people. Methods of selecting government officials are on the whole inferior to methods of selecting leaders in private enterprise.

More important, however, is the fact that government officials are not risking their own funds. Therefore, they have less direct incentive for economy and efficiency in spending those funds, especially borrowed funds. To newcomers in Congress the political cynics say, "If you want to be reelected, vote for all appropriation bills and against all tax measures." Because of government's coercive powers it can carry mistaken policies further than can private enterprise. By taxation or by repudiation of contracts (e.g., abandoning the gold standard) it can continue unsound policies by shifting losses to groups which are politically weak, although they may be economically important. Private enterprise, fortunately, does not have such privileges. How Government May Help However, government in several ways may aid private enterprise in generating purchasing power and in directing it to productive uses: 1. Government agencies can help collect and make available facts needed by private enterprise in planning for the future.

2. Government can help remove obstacles to production and free exchange, such as monopolies, trade barriers, and needless redtape. 3. It can help break down rigidities during a period of readjustment and thus facilitate recovery. For example, bankruptcy proceedings, which are for the purpose of revising contracts with investors and creditors, should be made simple, economical and rapid. Trade unions should be prevented from maintaining barriers to free exchange of services. Business monopolies should be prosecuted. 4. Government can encourage the building of private equities, which are the chief sources of private credit. At the present time this requires a large reduction in tax rates on business profits. Profits provide an incentive to business spending. Reinvested profits furnish assets on which an expansion of bank credit may be based, 126 DO WE WANT FREE ENTERPRISE? Profits also permit expansion of output by those producers who, because of their efficiency, can pay higher wages to labor, provide higher returns to investors, and give better bargains to consumers.

5. Government can to some extent postpone needed public works to be carried on in periods of abnormal unemployment. So far governments have not shown themselves to be more successful than the general run of private investors in business forecasting. They usually have done most of their borrowing and building in boom times along with private enterprise and so have been compelled to retrench in depressions. The chief obstacle, however, to use of government investment as a counterweight to private investment is the tendency to use government credit as a means of maintaining prices and wage rates. This prevents necessary readjustments and prolongs the period of readjustment and depression. Government spending, even in depressions, should be governed by the same economic considerations as influence private enterprise. This means keeping costs low, using efficient methods, paying no more than necessary for labor and materials, and spending only for those things which will repay their costs through increasing the efficiency of the nation as a whole.

What Government Should Not Do Several things government should not do because they discourage and prevent the development of private sources of purchasing power. 1. It should not undertake projects which can be carried on by private enterprise. The WPA, for example, drove private contractors out of the field of public building. This caused a contraction of private spending and private employment. 2. Public relief for the unemployed and the unemployables should be undertaken as a means of relieving suffering, not as a means of increasing purchasing power. Handouts to nonproducers—for example, payments to farmers for plowing under their crops—reduce the nation's purchasing power in the same way that unproductive use of credit by private enterprise reduces purchasing power. It reduces quantities of goods to be purchased, deprives producers of credit, raises costs of production and reduces profit margins.

Needlessly generous payments to the unemployed discourage their enterprise and prevent their reemployment. 3. Above all, government should not attempt to make money abundant.

GOOD MONEY IS ALWAYS SCARCE 127 To the individual an increase in his supply of money means an increase in his purchasing power. He sees in money the key to all the economic goods he wants. To the community, however, money is useful only insofar as people don't have enough of it and will work to get it. The real national income, or total national purchasing power, is increased by production of goods, not by manufacture of money. Therefore, sound government policy should be directed to increasing the amount of useful work done for the money which the community has to spend. This means removing obstacles to production, especially manmade obstacles, such as monopolistic agreements which prevent would-be producers from making the most efficient use of their abilities. To the inflationist or "managed currency" advocate, however, insufficiency of money seems a chief obstacle to production and a chief cause of restrictionism by organized labor, farm and business groups: "Wartime inflation abolished unemployment in the United States and elsewhere. It caused trade unions to give up many restrictive policies. Instead of farmers' asking for crop restrictions they now complain of shortages of labor and machinery needed to increase output."

The advocate of a "managed currency" grants that a runaway inflation would be costly. But he asks, "Why repeat the mistakes of other nations who carried a good thing (currency expansion) too far? Let us continue inflation only up to the point of full employment. Beyond that point we can prevent inflation by curtailing government spending, by raising rediscount rates and by increasing taxes so as to keep total demand for goods in step with total supply." "If All the Land Were Apple Pie . . ." What inflationists and managed currency advocates overlook is that the quantity of money, credit or wealth depends on its quality. A carload of German paper reichsmarks in 1923 represented less real money than one American paper dollar. A bushel of bonds may be worth no more than a bushel of newspapers. One piece of metal is waste for the scrap pile while another is a valuable instrument, depending on differences too minute to be visible to the naked eye.

128 DO WE WANT FREE ENTERPRISE? Differences in the way money and credit are used ultimately determine their quantity. Decreases in quantity arise from waste, or misuse, of money and credit. While such abuses continue, attempts to increase quantities in circulation are futile. National prosperity does not depend on how much money people have or on how hard they work so much as on what they spend their money for and how effectively they use their time. Economic progress is much more than a matter of multiplying the quantities of articles and services. The average American in 1929 was enjoying nearly 3 times as much real income per annum as his grandfather did in 1849. But the 1929 income did not consist in 3 times as much of the same kinds of things as people consumed 80 years ago. Doubling the quantities of every commodity and service now available to consumers would not double the national income. Most of the extra food, for example, would go into garbage cans to increase the difficulties and costs of garbage disposal.

The most difficult problems in expanding production are not maintaining full employment or multiplying quantities of commodities. Instead, the really difficult problems are: 1. finding out the new proportions in which goods and services will be wanted by people whose incomes are rising; 2. devising the new types of commodities and services which prospering people will want; 3. inducing workers and investors to make the necessary changes in types of work and investment. These problems are especially difficult for a nation like the United States, which is the economic proving-ground for all the world. Even the consumers themselves have only vague notions of what forms they want new wealth to take, and they are constantly changing their opinions as they try out first one thing and then another. Is it surprising that a nation must take time out every now and then to reconsider and revise its economic plans and methods ?

Trying to avoid or shorten these "time-out" periods by injecting new currency into the economic system is like trying to avoid interruptions in a football game by doping the players. A nation can minimize depressions by providing opportunity and encouragement to thrift, industry, inventiveness and enterprise on the part of all the people. This is the course followed by nations which set the pace for world progress.